Organizations must adapt continuously to their environment to survive. At the same time employees demand stability and predictability. One way of providing that stability is the leader showing commitment. The principal ensures her employees future change is unlikely and motivates them to invest in task-specific skills. The cost of commitment is organizational inertia, a limitation to adapt the organization to environmental pressures. This paper examines the ability of the principal to commit, using a principal-agent model in which both the principal and agent are risk-averse. I show that some degree of organizational inertia can be of value to the firm. In a Cournot framework, commitment limits the firm in its competitive possibilities. However, commitment is an incentive for the employee to exert more effort. Subsequently, I show that a leader does best to show commitment when uncertainty is high to prevent emplo

Delfgaauw, J.
hdl.handle.net/2105/16298
AE / Algemene Economie
Erasmus School of Economics

Oosten, R. van. (2014, July 23). The Influence of Competition on Organizational Inertia. AE / Algemene Economie. Retrieved from http://hdl.handle.net/2105/16298